Investments Under Uncertainty in Air Transportation: A Real Options Perspective

Abstract

Infrastructure investment decisions in air transportation are difficult because of long lead times, large capital expenditures and the technological, market and political uncertainties inherent in aviation. In such an environment, a flexible investment strategy is a means of managing risk. The central idea is to structure the investment so that it would benefi t from the upside potential if circumstances are resolved favorably, but would be protected from downside losses otherwise. In this paper, an evaluation methodology based on system dynamics and Monte Carlo simulation in a real options framework is utilized to evaluate different flexible infrastructure delivery strategies.